Thinkpad: A Multi-Speed World

The global landscape is looking a little bit like an Indian city road right now. The two-wheelers riding alongside the trucks as the Ferrari looks for a clean stretch to whiz past.

Didn’t get it? Yes, it’s a stretch, but humor us.

The Ferrari, at present, is the U.K. economy. The Bank of England became one of the first major central banks to start deescalating Covid-19 crisis policies. It followed the Bank of Canada, which has also signaled a reversal in policies.

The BoE slowed its emergency bond buying programme and signalled it’s on course to end the crisis support by the close of 2022. The U.K. economy is set to grow at 7.25% in 2021, which, according to Reuters, is the fastest since World War - 2. Of course, the caveat applies that even with these growth rates, the country’s economy only moves back to 2019 levels by year-end.

But the central bank clearly has enough comfort in the durability of the recovery to start winding down.

Back to our Indian road analogy.

The truck on the road is the U.S. and the Federal Reserve. It occupies a lot of the (mind)space, can slow all traffic if the driver takes the foot off the pedal, can cause large accidents if it goes too fast. Steady-as-it-goes is best for the truck.

And so the U.S. Federal Reserve remains ultra-easy. There was a diversion this week when former chief Janet Yellen (force of habit!) said rates may need to rise “modestly” to prevent the economy from overheating. Stock indices swooned and a clarification followed quickly. Oops. Another small signal (like a timid honk) emerged from the Fed this week. “Vulnerabilities associated with elevated risk appetite are rising,” the Fed’s Financial Stability Report cautioned. The honking may get louder with time.

The two-wheelers are the emerging markets, India included. Weighed down by the weight of the second wave, they are struggling for speed.

India’s outbreak continues to be brutal and devastating. JPMorgan’s mobility and activity tracker is now 30% below the mid-February peak and the effective unemployment rate is 14.5% compared to 12.5% before the start of the second wave and 7.5% pre-Covid, chief India economist Sajjid Chinoy said in a May 7 note.

The second wave forced the Reserve Bank of India to reopen emergency facilities, like the one-time restructuring scheme, this week. Any expected exit from crisis policies stands delayed.

There, now you know where we were going with the road analogy!

The multi-speed world that we face has implications for markets and policy.

First, as JPMorgan has warned the U.S. economy will outpace emerging markets at an “unprecedented” rate in the quarter ended June. Why then would investors be drawn to EMs? India has already seen foreign investors selling a net of Rs 9,659 crore in local equities in April and another Rs 7,023 crore in May.

The divergence between developed and emerging economies will also make life tougher for central banks. We worried about normalisation of global financial conditions leading to premature tightening in local markets even before the Covid-19 second wave hit. Those issues could get more complex now.

While all this plays out on planet earth, on planet crypto, a battle for supremacy is underway. Here, for the past week, the Doge has ruled. The Dogecoin, with a market value of some $80 billion, is now more valuable than Moderna which is trying to save us from a once-in-a-lifetime pandemic, Financial Times’ Robin Wigglesworth pointed out.

But the Doge’s powers are apparently stronger than any vaccine—it has the attention of Elon Musk, who hits Saturday Night Live this weekend. And so the Doge soared like a rocket, leaving everyone wondering if it’s time to take it seriously. If you don’t, you risk being put in the ‘Doge’House like discount brokerage Robinhood and India’s largest cryptocurrency exchange WazirX.

You gotta ask...♫ Who let the Doge out...Who...Who...Who... ♫

Stay safe.